Preparing for the FLSA's New Salary Thresholds for Highly Compensated Employees

The Fair Labor Standards Act (FLSA) has introduced a final rule that will significantly increase the annual salary thresholds for the highly compensated employee (HCE) exemption from overtime pay. This change is creating a challenge for many employers as they navigate how to comply with the new requirements while managing their workforce effectively.

?

Key Changes and Timeline

Under the new rule, the total annual compensation requirement for HCEs will increase from $107,432 per year to $132,964 per year on July 1, 2024. This threshold will further rise to $151,164 per year on January 1, 2025. Additionally, the earnings thresholds will be updated every three years starting July 1, 2027.

According to Natalie Bare, an attorney with Duane Morris in Philadelphia, this substantial increase is expected to affect nearly 300,000 currently highly compensated employees who rely on the relaxed job duties test for this exemption. Employers must now decide whether to reclassify these employees, adjust their compensation, or modify their job responsibilities to maintain compliance.

?

Understanding the HCE Exemption

The HCE exemption is part of the FLSA’s “white-collar” executive, administrative, and professional (EAP) exemptions. To qualify for these exemptions, employees must be paid a salary that meets the threshold amount and satisfy certain duties tests.

The Department of Labor (DOL) introduced the HCE exemption in 2004 as a simplified method for testing a select group of employees for exemption. Employees who perform office or nonmanual work and meet the annual salary threshold for HCEs, and who are paid on a salary basis, can be exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive or administrative employee.

?

Criteria for Classification as an HCE

To classify an employee as an HCE, the following criteria must be met:

1. Annual Compensation: As of July 1, 2024, the employee must be paid a total annual compensation of at least $132,964, including at least $844 per week on a salary basis. Effective January 1, 2025, this threshold will increase to $151,164, including at least $1,128 per week on a salary basis. The weekly salary must be paid in its entirety, without using nondiscretionary bonuses or incentive payments to satisfy any portion of the weekly standard salary level.
2. Primary Duty: The employee’s primary duty must include performing office or nonmanual work.
3. Exempt Duties: The employee must customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee. This duty must be performed regularly and recurrently, not just occasionally.

?

Challenges and Strategic Responses

Employers face several challenges in addressing the new thresholds. They may need to reclassify HCEs as nonexempt, increase their compensation to maintain HCE status, or adjust their job responsibilities to meet the full duties test under an EAP exemption. Each option comes with its own set of considerations:

• Reclassification: Reclassifying HCEs as nonexempt can lead to feelings of disappointment among employees accustomed to the flexibility of exempt status. Employers must ensure proper calculation of regular rates of pay for overtime purposes to avoid litigation and overtime liability.
• Compensation Adjustment: Increasing salaries to meet new thresholds requires careful consideration of direct and indirect costs, including the impact on future salary increases and pressure to raise salaries for other employees.
• Job Role Adjustment: Employers can restructure job roles to ensure HCEs consistently perform work that meets the full job duties test for their exemption. This approach may involve updating written job descriptions and providing necessary training to ensure smooth implementation.

?

Suggested Steps for Employers

To prepare for the upcoming increases, employers should:

1. Identify Affected Positions: Determine which positions will be affected by the initial and subsequent increases.
2. Evaluate Options: Assess the potential impact of raising salaries, reclassifying employees, or adjusting job responsibilities.
3. Make Decisions: Decide on reclassification, compensation adjustments, and the timing of these changes.
4. Develop a Strategy: Create a strategy for implementing changes, including communication plans for employees and managers, and updates to written policies and job descriptions.
5. Ensure Compliance: Confirm that employees meet the requirements of the salary basis test and the job duties test for their exemption under both the FLSA and state law.

?

Conclusion

The upcoming changes to the FLSA’s salary thresholds for highly compensated employees require strategic planning and careful implementation. Employers must navigate these adjustments to maintain compliance and manage their workforce effectively.

Axis HR Solutions specializes in helping businesses adapt to regulatory changes and optimizing their HR strategies. Our expert team can assist you in evaluating your options, making informed decisions, and implementing changes smoothly. Visit our website at axishrky.com to learn more about how we can support your organization through this transition and beyond.